Milling & Baking News - February 15, 2005 - 6

E D I T O R I A L

E.U. asserting leadership in support reforms

or the first time since the 1962 establishment of the
Common Agricultural Policy as the foundation of
what is now the European Union, claims are being
made that the E.U. is leading the world in reforming its agricultural programs to avoid interference with world trade.
This is a major transformation, considering that the E.U.
for most of the past 40-plus years had viewed the C.A.P. as
initially a way of securing domestically-produced food for
its member countries and more recently as a way of assuring grain farmers and others of returns that often exceeded
market-driven prices. Ten member countries at the start
of 2005 began implementing a "fundamental reform" of
the C.A.P. approved by farm and national leaders in June
2003. Six nations, including France and Spain, will adopt
the new approach in 2006 and the rest of the member states
must change by 2009. Central to the reform is decoupling
production from payments made to farmers. No longer
will wheat or corn farmers, for instance, receive payments
tied to their harvests. Instead, a "single payment scheme"
(S.P.S.) is being implemented that rewards farmers primarily on the basis of adherence to environmental, food safety
and animal welfare standards.
Just how great is this change, at least in the minds of
E.U. officials, was made clear when Mariann Fisher Boel,
the newly-named E.U. commissioner for agriculture and
rural development, declared, "The C.A.P. at the beginning of 2005 is nothing like its popular caricature." The
latter apparently refers to a C.A.P. shielding farmers
from market prices. Historically, domestic prices have
been maintained above market levels, large stocks were
built and export subsidies were used to move surplus
production, disrupting world trade. That the E.U. has
decided to use export restitutions to move 2 million
tonnes of wheat on the world market raises questions
about the validity of some of these claims.
Further, before these claims of radical change gain widespread acceptance, it's important to realize that the modified
C.A.P. still maintains intervention prices at which the E.U.

stands ready to purchase production of most grains, regardless of the level of world prices. For grain producers, the
principal change is a halving from the former levels of the
monthly increments in the cereals sector. In addition, large
farmers will see their direct payments reduced in order to
provide funding for rural development. And while decoupling is the main feature, the E.U. program allows individual
countries to maintain "limited coupled elements to prevent
abandonment of production" in selected regions.
Also important is recognizing that decoupling -removing the influence of government programs on farmers' decisions - originated in the United States many
years ago. Indeed, the 1986 U.S. farm act ended support
programs that for decades had been tied to outturns
of individual crops. This change has led to the recent
downward course of American wheat production.
The E.U. believes that severing the link between
subsidies and production "will make E.U. farmers more
competitive and market orientated, while providing the
necessary income stability." Ms. Fisher Boel goes so far
as to say that "the reform will allow Europe's farmers
to become true entrepreneurs." She focuses on how the
reforms "will allow us to play to our strengths, producing world-renowned foods of the highest quality." While
adhering to the cap on agricultural support spending
imposed by the E.U. during prior negotiations, the new
program is designed to make more money available for
environmental, quality and animal welfare programs.
In addition to fundamental reform of supports as the
principal reason for this year's C.A.P. changes, E.U. officials give nearly equal attention to their expectation that
this new approach will greatly strengthen the union's negotiating hand in the current Doha Round of World Trade
Organization talks. Ms. Fisher Boel goes further when she
says of the reformed C.A.P., "It sends out a strong signal,
boosting the chances of a successful outcome to world
trade talks." Returning to the use of export subsidies
makes for wonder about the reality of these reforms.

Internet grocery shopping once again appears

hen the Internet bubble burst several years ago,
hardly anything reverberated through grainbased foods more strongly than the collapse of
companies that were offering on-line grocery shopping.
Companies such as Webvan and Peapod, which at the top
of the Internet boom were envisioned as taking over a major share of retail food sales, saw their businesses collapse
with staggering losses. Even as these businesses, prior to
the collapse, had struggled to approach breakeven status,
an increasing amount of attention was being given by
food processors to how Internet grocery shopping might
change the way products such as bread were marketed.
Concern particularly focused on the practice of many
of these technology-driven companies to curtail sharply
the number of brands and product range in order to
achieve what were perceived as distribution efficiencies.
This practice created much worry among second and
third brands, particularly as the Internet-based grocers
sought to establish national distribution.
In the wake of the implosion of these early pioneers,
it would have been unwise to conclude that finish had
been written to sales of bread via the Internet. In America,
the business has revived mainly at the upper ranges of
food retailing, with efforts to compete with grocery stores

bakingbusiness.com / world-grain.com

mainly being restricted to the largest metropolitan areas.
In the United Kingdom, where this sort of retailing suffered the same fate in the earlier boom and bust as it did
in the U.S., a single company with national sales aspirations has progressed to the point where talk is once again
heard of an initial public offering, perhaps sometime in
the first half of 2006. Using the warehouse-based model
for grocery "picking," instead of relying on retail stores,
the company named Ocado has attracted attention even
though its costs have exceeded original budgets.
As talk about a public offering intensifies, the founders seem confident of their approach, which is tied to a
single grocery brand in the U.K., the upscale Waitrose
stores. Operating currently from one warehouse, supplemented by "distribution hubs," the company plans to
extend its reach by adding warehouses, but avoiding the
aggressive expansion that led to the prior collapse. This
time, it will occur only when "operational profitability"
is reached. Anticipating a return to unbridled enthusiasm about the possibilities of Internet food retailing, a
few financial analysts have begun to cast doubt on the
entire scheme. They note that "operational profitability"
overlooks many expenses as well as the high cost of delivering bread bought this way. MBN
Milling & Baking News, February 15, 2005 / 7

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Milling & Baking News - February 15, 2005

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